Coal Firm Says Investors May Miss Mother Lode

Zeigler Contends Future Is Promising Despite Contractual Disputes

January 08, 1995|By John N. Maclean, Tribune Staff Writer.

COULTERVILLE, Ill. — In a coal seam 215 feet below the Earth's surface, mining machines rumble through narrow passageways like prehistoric dragons, gobbling great chunks of coal from the mine face and carrying them to a speeding conveyor belt.

It takes 35 seconds for the carrier to discharge a 15-ton load of coal onto the belt for its trip to the surface-it used to take 55 seconds for an older machine to discharge a 10-ton load. If the carrier has a mechanical problem, it's logged into a computer. Repairs are done on a strict schedule, saving replacement costs-a new mining machine costs $1.3 million, a rebuilding job $525,000.

"It used to be hunch work," said Clifford Walker, superintendent of mine No. 11 for Zeigler Coal Holding Co., the No. 4 producer of coal in the U.S. "Now I get a report every morning telling me exactly what I spent the day before-yesterday a cutting motor went out. That's $11,000."

A crew of eight works at the mine face. They mark coal to be cut, dig it out, haul it to a conveyor, drill bolts into the mine roof to stabilize the tunnels and keep equipment running. In 1980, the same operations took a crew of 16.

Production and safety have been so satisfactory that miners at No. 11 have collected $200 bonuses the last two quarters.

Last September, Zeigler Coal made its first public stock offering, presenting itself as a growing, low-cost producer of a cheap, abundant energy source.

So far, the stock has been a disappointment for investors, currently trading between $11 and $12 a share after being offered at $15 a share.

Chand B. Vyas, Zeigler's chief executive officer, and analysts who follow Zeigler say the financial community may be missing a good thing. Zeigler's stock has fallen, the analysts say, mainly due to concern over ongoing litigation.

At issue: a highly lucrative, long-term coal contract between Zeigler and its biggest customer, Carolina Power & Light.

Rather than focusing on the legal case, investors might better focus on the long-term future of Zeigler and coal, they say.

Indeed, the changes have been sweeping-inside the mines and out. In addition to using better machines and techniques, coal companies around the world have been consolidating.

Zeigler is a prime example: Vyas led a management buyout of Zeigler Coal Co. in 1985 from Houston Natural Gas. The company moved its headquarters from Chicago to in Fairview Heights in southern Illinois. It operates five mines in the state, 13 overall from Kentucky to Wyoming.

Zeigler bought the Old Ben Coal Co. in 1990 from BP America, and Shell Mining Co. from Shell Oil Co. in 1992. All these moves were part of ongoing sales by oil and gas companies of coal assets they bought over the last several decades as a hedge against oil shocks.

Zeigler used the proceeds from its public offering-about $140 million-to retire debt from those acquisitions. Zeigler continues to seek more coal properties to buy.

With fewer companies owning more assets, less productive mines have been closed. About 1,100 coal mines in the U.S. have been shut down since 1990.

Adding to the pressure, clean-air legislation has made high-sulfur coal, abundant in Illinois, less desirable than low-sulfur coal found in the West and central Appalachia, at least for the next few years. Employment in Illinois mines has fallen to about 7,000 from a high of 18,000 in 1980, according to the Illinois Coal Association.

"Zeigler is one of the few coal companies making an effort to maintain a presence in Illinois," said Joseph R. Angleton, president of District 12 of the United Mine Workers.

The old Zeigler Coal Co. was formed by Chicago financial giant Joseph Leiter in 1904 to compete against Eastern coal suppliers. Leiter founded the Downstate town of Zeigler, scene of much violence in the early days of mining.

Today, Zeigler controls 1.4 billion tons of coal reserves, of which about 800 million tons are low-sulfur coal, much of that in the Powder River Basin in Wyoming. Zeigler is the largest coal-only company on the U.S. stock market (many other producers are private or foreign-owned). About 80 percent of its sales are to electric utilities.

One of those utility contracts is now under dispute. Zeigler sells coal at a high profit under a temporary Kentucky circuit court order to Carolina Power & Light. The utility has claimed the sulfur context of the coal is higher than contracted, and Zeigler doesn`t have ample reserves to fulfill the contract as specified from its Wolf Creek mines in Kentucky.

"By far the predominant issue for stockholders has been the Carolina Power & Light case," said Rafael A. Villagran, analyst with Lehman Brothers, the firm that helped bring Zeigler public. He said, however, Zeigler now is fulfilling all terms of the contract and a settlement favorable to both parties is far more likely than cancellation of the contract, which has 10 years to run.